4 min read

How We Got Here

The shortest explanation is to quote a few words from Ernest Hemingway's The Sun Also Rises:

"How did you go bankrupt?" Bill asked.
"Two ways," Mike said. "Gradually, then suddenly."

Following a brief slowdown from the pandemic in 2020, financial markets underwent a V-shaped recovery, seemingly overnight. Global share prices rocketed to all-time highs, home prices around the world shrugged off pandemic effects, emerging trends in alternative assets like cryptocurrency and NFTs shot up in popularity, and price.

Every Tom, Dick and Harry got a job, a raise and a smiley face on their investments.

Few people, including the so-called "experts", commentators and PhD in Economics-holders could see the inherent risks we now see with the wonderful thing that is hindsight.

It's easy to say now that the writing may have been on the wall:

  • Interest rates were at historic lows (where they couldn't stay forever);
  • Central banks around the world were boosting economies and markets through quantitative easing;
  • Stimulus measures flooded global markets;
  • Tech companies that had never made a buck were going public one after the other at outrageous valuations;
  • Video game retailers and cinemas that were meant to be on their last legs were making people rich;
  • Hell, even 'currencies' named after the breed of my dog were making people millionaires after increasing 50,000,000%;
  • Oh, and remember SPACs?

Then, gradually, a series of events made inflation rear its ugly head. Inflation that was meant to be "transitory". The war in Ukraine, more lockdowns in China, supply chain issues, 8% year-on-year CPI prints. They all contributed. Rumours of Fed rate hikes quickly became real.

However, companies kept believing the momentum would continue. Tech firms continued to go on hiring sprees and continued to buy up other companies at massive premiums.

Investors continued to believe growth would continue as it had for so long and continued paying premium prices for high-growth companies.

New investors jumped in with fear of missing out.

Now, suddenly, investors have a fear of holding on.

The most notable new tech IPOs lost at least 65% from their initial prices.

Cryptocurrencies, including stablecoins, erased billions in value leaving them with a confidence crisis that is making a lot of old wise folks smirk.

Central banks around the world are taking action to deal with soaring inflation.

Recession could be around the corner.

We have gone from peak euphoria to peak fear in a matter of months.

Looking at a few major global indices so far this year:

  • The S&P 500 is down ~22%
  • Dow Jones down ~17%
  • Nasdaq down ~30%
  • Euro Stoxx 50 down ~20%
  • Shanghai Composite down ~9%
  • Nikkei 225 down ~11%

So, a lot of people's savings have been slowly dwindling unless they invested heavily in markets like Turkey, or Chile. But who does that?

We now enter the most challenging part of the bear market: The tedious middle. "This is the portion of the bear cycle where we’ve fallen far and long enough to have scared off the BTFD crowd. There is an excess of bears. More importantly, a variety of technical indicators are near as oversold as they ever get. It is encouraging to those who are hoping the worst of it is behind us."

+ When do stocks bottom? "Seven out of the last twelve bear markets have bottomed in 46 days or less once the -20% level was breached." [The Irrelevant Investor]

+ Keep It Going. The most important investing question is not, “What are the highest returns I can earn?” It’s, “What are the best returns I can sustain for the longest period of time?” [Collaborative Fund]

+ The World’s Bubbliest Housing Markets Are Flashing Warning Signs. "As central banks around the globe rapidly increase interest rates, soaring borrowing costs mean people who were already stretching to buy property are finally reaching their limits. The effects are being seen in countries such as Canada, the US and New Zealand [and the the UK], where once-hot residential real estate markets have suddenly turned cold." [Bloomberg]

+ Six Things That Might Go Right. Inflation eases/rates stabilize; growth accelerates; corporate profits hold up ok; Russia/Ukraine war ends; better valuation, better future returns; investors learn and become better long-term investors. [Validea]

#3. Sources of Interest 💡

  • We finally know when the Webb telescope's first colour images will arrive. "It's the moment we have all been waiting for: the James Webb Space Telescope will make its first scientific observations of the universe in the coming weeks. The first full-colour images will drop on July 12, 2022. Along with spectroscopic data." Here's what to expect. [Inverse]
  • Is Human Intelligence Simple? How did we get so smart? "If you zoom way out and look at the history of life on Earth, humans evolved incredibly recently." The first of what I'm sure is going to be an interesting series. [Rough Diamonds]
  • What’s Lost in Translation? "Anyone who wants to understand the Chinese government’s intentions and only considers the English version of a document risks misjudging them." [US-China Perception Monitor]
  • Belief in God in U.S. Dips to 81%, a New Low. As time goes on, as tech advances and as science progresses (and as Gen Z create more Tik Toks), this comes as no surprise. Between 1944 and 2011, more than 9 in 10 Americans believed in God. It was 87% in 2017. Young, liberal Americans are the least likely to believe in God. Really, no surprise. [Gallup]
  • A history of modern art: your non-snoozy guide. "What would you do if you saw Picasso walking in front of you down Piccadilly?" Munnings asked Winston Churchill. "I would kick him up the arse, Alf" was, apparently, the reply... The story of modern art amounts to far more than some dreary succession of competitive “isms” delivered amid swathes of academic padding... The main characters in its story are as frequently rebels, rogues and reprobates as they are scholars or thinkers or philosophers. [The Times]
  • Johnson on Churchill. I don't like much about Boris Johnson, but I did enjoy uncovering (thanks to a newsletter from David Perell) this old video hearing him speak about Winston Churchill's linguistic prowess. He shares oration lessons from Churchill and says that politicians should speak with more Anglo-Saxon words, and rely less on the use of Latin-inspired ones.

Happy weekend.